The Importance of Payback Period for SaaS Startups

tomtunguz.com – One of the most powerful levers for SaaS companies to master is payback period. Payback period is the number of months a company requires to payback its cost of customer acquisition. The median SaaS startup has a payback period of 15 months on a gross margin basis.

A short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster.

Let’s take a hypothetical example of a SaaS company at $625k in ARR, growing at 15% per month. The company has 25 customers each paying $25,000 and operates with an 80% gross margin. The company bills monthly.